Month: March 2008

Sometimes party lesders should be careful about their wishes. They may come true in undesired ways. Nick Clegg could well end up with fewer Lib Dem MPs after the next election, as they continue on their course of promise breaking Euroenthusiasm, but not because the total size of the Commons has diminished.
As the Leader of the 3rd party he has to try to find ways of seeking attention and avoiding the squeeze. His enthusiaism for a smaller Commons apes a number of past Conservative proposals, but it was linked to the insatiable quest for more taxpayers’ money. Stung by past Lib Dem troubles with their largest donor before the last election, and with difficulty in raising all they would like now, they are desperate to find a way of selling party political taxpayer funding to an electorate who likes it as much as having their roof taken off by the storm. So, opines the sage of Sheffield, why not cut the number of MPs, so any increase in taxpayer funding can be “paid” for out of the savings on numbers.
He adds the rider that maybe a government could spend less on so-called “public information” advertising – doubtless true. He at best muddled his way through an interview by confessing we could only manage with fewer MPs if more power was devolved elsewhere. Does that mean more cost in local government instead then? Not for him any robust defence of the idea that MPs should become more productive by representing more people.
He knows his poor handling of the EU matter can still haunt him as Lib Dems queue up in the Lords to back the government’s approach of no referendum. He may be dimly aware that next year’s European elections are unlikely to help him either, as Lib Dems fail to get back up to third in many places.
I enjoyed the Euro Clegg versus Euro Huhne contest – the Clegg and Huhne race. I always thought Clegg would win, but never saw him as a great threat. The truth is, all the time the Lib dems let the people down over a Treaty referendum, they will pay for it in the ballot box.

Stability, stability, stability. If he says it often enough, the Chancellor thinks people will believe it.

The stability mantra comes from the same stable that gave us the whopper about making the Bank of England independent. They meant they were dismantling the Bank’s role in the debt and money markets by nationalising the issue of government obligations and transferring daily supervision of the banks’ financial operations to the FSA.

It comes from the team that sold great quantities of the nation’s gold reserves at the bottom of the gold market.

It comes from a government that has presided over a huge rise in the numbers of civil servants, quango staff and regulators of all kinds who spend large sums on private sector consultants to advise them on how to do their jobs.

It comes from a government which married Prudence for their first couple of years and did relatively well on the back of it, but divorced her in the new century in favour of an avalanche of public spending.

It comes from a government that slid £16 billion of supplementary estimates through on Monday – admitting their financial controls and budgets had broken down again this year – only to stage manage media interest in a few hundred million of more desirable expenditure presented as the important crux of the budget.

This is a budget of the spinners, by the spinners, for the spinners.

David Cameron’s response was hard hitting and down to earth. He drew attention to the high taxes, the surging borrowing, and the unpleasant inflation that the budget encompasses. He said Labour should have put something aside in the good times for the not so good times. They should have mended the roof when the sun was shining, for now it is blowing a gale.

So what would mending the roof entail? Above all, it should entail getting the public sector into the way of thinking that it has to do more with less, or in the case of health and education to raise standards by more than the increase in cash.

Mending the roof means controlling the massive overheads. Why do we need regional unelected regional government in England? Its unpopularity in the North East referendum should be proof enough to alert politicians that it would be best swept away.

Why do we need a huge national identity bank and ID cards? Let’s stop the spending on that doomed project now.

Why do we need 750,000 civil servants, when previous governments could run things perfectly well with 200,000 fewer? Shouldn’t we impose a staff freeze immediately, so natural wastage can start to get the administration back into shape?

Why is the absentee rate so much higher in the public sector than in many private companies? Shouldn’t Ministers start managing this, and motivating their staff better so more turn up?

Why won’t the government produce a plan to get the £25 billion it has lent Northern Rock back to an agreed timetable?

Why has the public sector taken so little action to improve building insulation, install heating and lighting sensors and controls so they only operate when needed, and to put in more fuel efficient lighting?

Why can’t the government curb the inefficiencies of its nationalised industry, Network Rail? Why can’t it find new revenue streams to avoid the closures and the costs at the Post Office?

Wherever you look at this government’s public sector you see the same lack of leadership from Ministers, and the same casual approach to taxpayers money. Senior executives receive large bonuses and substantial incomes for performance which many service users think is inadequate.

It is indeed time to mend the roof – and to fix the rest of the building – as the storms sweep in. This credit crunch is not just about some dubious mortgages in Florida or the illiquidity of some US banks. This is also about overborrowing here in the UK, about a run on a UK mortgage bank, and about a government struggling to control its finances with an urge to put its taxes and charges up to pay some of the bills.

The Chancellor shuffled a few hundred million here and a few hundred million there, as if he were running an economy one tenth the size of the UK’s. The overall increase in spending is dwarfed by the huge supplementary estimates that went through with precious little explanation on Monday. The big tax hike on alcohol will pay for very little of those big spending increases, so we now know most of that money is going to be borrowed.

The budget speech contained endless references to “stability” as if repeating the word would deliver the desired result. If the Chancellor really wants stability, he needs to take the kind of action the US is taking to prevent the sharp slowdown getting out control – tax cuts and more assistance in money markets. The reason he cannot do this, is he has allowed careless spending in his inefficient public sector, taking public borrowing and spending to record levels just before the downturn in growth hits the figures.

What we needed today was a serious analysis of the turmoil in credit and banking markets; an explanation of how quickly the vast sums lent to Northern Rock will be repaid; and a drive to raise the productivity of the public sector to curb its inflationary costs. Instead we were treated to little homilies on plastic bags, drinking and driving, as if they were the most important things on the Chancellor’s mind. He should be spending his every working hour trying to get to grips with the credit crunch and the Rock mistake. That is serious money. This was a budget of penny packets that will have no overall economic impact, though it will annoy those in the drink trades.

The budget will only move a few billions around – not enough to have a major impact on the state of our economy. Long gone are the days when budget secrecy rules the roost, and when Chancellors had to resign if they leaked any of the budget measures. All the main news outlets this morning had a strong story that the budget would drop an immediate further increase in petrol duty. So I expect to hear that soon, but I don ‘t expect the Chancellor to resign! We will probably have to pay some more green taxes and some booze taxes, and there may be some benefit increases to tackle child poverty, to offset part of the abolition of the 10p Income Tax band.

Meanwhile, the Credit Crunch is the spectre at the feast. Yesterday the Feb made another $200 billion available to banks, on the top of the chunky $200 billion they offered last Friday. The Bank of England managed £10 billion, as part of a coordinated package which included action from the Bank of Canada, the ECB and the Swiss Central Bank as well. The main Western Central Banks are engaged in a gargantuan struggle to keep the wheels of the credit markets turning. They are now trying to rescue good quality loans, not just sub primes.

The actions day by day in the money markets will determine how uncomfortable our future will be. The sums involved will dwarf anything in our domestic budget announcements. The Budget will concentrate on shuffling taxes around, because unfortunately there is no scope to offer tax cuts. Tax cuts are badly needed, and are being offered in the USA as part of the total policy to rescue the US economy from sharp slowdown. The UK government has been too profligate during the good times, and now has nothing left in the tank to help at a time of credit squeeze.

The Us will probably reinforce its bold action in the money markets with further interest rate cuts. The Bank of England has fewer shots in its locker. We will probably be told today that the UK economy is better placed than most to handle the world turbulence.With high inflation, slowing growth and an overextended public sector is difficult to endorse that conclusion. For all our sakes I hope the US action is sufficient and it works. Clearly the UK has nothing like the flexibility and firepower of the US authorities, and has foolishly used up so much on the nationalisation of just one distressed bank. Today, as we hear Mr Darling shuffling the odd billion or two of tax, we should keep in our minds the £110 billion of liabilities he has taken on.

Yesterday the government rushed through a whole series of supplementary estimates before the budget. MPs were given a bumper book of spending overruns to try and get to grips with. There was a £2.3 billion increase in health, £2 billion at transport, and £5.7 billion at Work and Pensions. What was more surprising was some of the percentage overruns in the smaller quangos. The independent regulator of NHS trusts put in for an extra 10%, and the department for national statistics an extra 7.5%.

I am sure some of the money is being well spent and is necessary, but the cumulative impact of all these overruns shows a government unable to keep control of spending and stick to its plans. Worse still, the estimates did contain Northern Rock, but had absolutely no figures in them for the costs and losses, and included £150 million for sorting out the mess on the tube.

If this government is going to handle our economy well during this credit crisis, it needs to start doing detailed work on its budgets, and ministers need to take an interest in keeping spending within the agreed totals.

Inflation is too much money chasing too few goods. Today inflation in the UK and the US is being driven higher by increases in the prices of energy, raw materials and basic foodstuffs, and in the UK by the costs of government. Much of the international inflation comes from excess liquidity in the oil exporting economies and from the demands of Asian economies which have built up large surpluses through successful exporting. The US and UK economies have bigger problems from the way credit has dried up, leading to job losses in the US and a sharp slowdown in the UK economic forecasts.

This makes high interest rates in the US and UK economies an inappropriate response to the inflation – something the US authorities have understood. There is clearly no excess liquidity in the US or UK private sectors. Asset prices on both sides of the Atlantic are falling. US house prices, shares and commercial property are either in freefall or are showing signs of distress. UK commercial property has fallen sharply, UK shares are down and most residential property prices are now static at best.If we had too much domestic liquidity you would expect some or all of these values to be rising, not falling.

Energy prices have risen partly because the emerging economies have need more and more of the limited supply, partly because the dollar and the pound have been weak currencies, and partly because despite global warming theory it has been a very cold winter in many parts of the northern hemisphere where much of the effective demand for energy resides. Food prices, especially grains, have soared. This is partly because the Asian customers want more and better food, but partly because the weather has been so bad affecting crop yields and partly because some global warming theorists have favoured using grains for fuel, diverting them from food.

The big pools of liquidity built up in Asia, Russia and the other commodity producing areas have helped power the prices of precious metals and other commodities, both to fuel demand for industrial products, and to satisfy new holders and hoarders of them.

The UK’s inflation rate has been increased by the inefficiency of the public sector, and the liberal use of higher charges and taxes to tackle what is more truly a problem of spending badly.

The correct response to the commodity price inflation in the west should be to ignore it, all the time there is no transmission from the higher metals, energy and food prices to wages and asset prices. So far there is some sign that some of the extra costs are being passed on by business, but no sign that either the US or the UK is about to have a worrying round of wage inflation. Passing the price increases on just shifts more of the pain from companies to the individuals who buy the products. It looks as if this inflation is going to lead to a reduction in the spending power of consumers in the UK, as neither the government nor the business sector are willing to take the hit. Indeed, the government is keen to divert attention from its own role in the inflation, by calling in parts of the private business world for punishment talks when their prices have gone up, as it is currently doing with the energy suppliers.

In the UK everything points to the need to cut the costs of government, not by doing less in the services that matter but by doing things better where they need doing. I set out in yesterday’s blog the need to cut UK government borrowing as part of our response to the present economic crisis. Today the message is reinforced by the inflation figures. The government has done the right thing in at last telling the public sector – including MPs – that this year’s pay rise has to be below inflation. It needs to do much more to get value for all the spending it is committing.

Today’s gales may be the last fling of an unpredictable winter in the UK. The parallel squalls on the markets need the authorities to realise they have a serious problem and get to grips with it if they wish to create calmer conditions.

The discussion of the budget has revolved around relatively minor matters of taxation that have most immediate impact on people. The three largest parties have been engaged in a strange dance over how to rejig taxes on alcohol, each defining a different position.

The government has allowed press speculation to build that they may increase taxes on middle class drinking. People are being readied to face increased duties on wine and spirits, sparing the lager drinking classes. We read lurid stories of how people are overindulging in the privacy of their own homes , and how this is according to some, possibly close to Labour, at least as bad as being sick on the streets, and turning violent in the town centre.

The Conservative party wants to spare the home drinkers and hit the young binge drinkers, opting for higher tax on drinks favoured by that group, balanced by reductions in alcohol tax elsewhere.

The Lib Dems arrived late at the auction following a little local difficulty abstaining on the EU. They decided they want to tax all alcohol drinkers more, balanced by a healthy reduction in tax on fruit juices. Memo – they are going to have some great parties then, going heavy on the guava juice.

It’s as if the Credit Crunch was still 2000 miles away and a few months ago. It was as if the banks were soon going to return to the “normality” of last spring, when deal makers were threatening to gear up to take over the largest of the corporations in the world market, and when Northern Rock would offer people 125% of the value of the house they were buying in a loan package designed to take the waiting out of wanting.

The reality is very different. Last week fear stalked the global marketplace. There was little money to buy bonds and to the lend from one bank to another. Good quality paper (loans that can be repaid) fell again in price. Buyers were only available in reasonable numbers for first quality government debt. The prices now being established for good quality instruments, if they become the norm, would mean huge new write offs across the banking sector. More write off means less capital available, which in turn means less money to lend. It also means a further huge increase in the amount of shareholder capital the world system will need to recapitalise the banks, and means a longer period of people having to pay more for their borrowing relative to money market prime rates.

The budget has to sort out this problem in the UK. Far from being exempt, we are a big part of it. The UK government, by being overborrowed itself, has left us weaker to respond. The increasing budget deficit and the failure to control public spending make us more vulnerable to the cruel winds of the credit crunch.

The Chancellor should turn his mind to the big picture. He should try to get on top of his own spiralling debt and spending, without damaging important public services. The good news is he can do so easily, because the management of the public sector is today so poor.

He could start by cancelling the nationalisation of Northern Rock and putting in place a proper banking package, to manage the taxpayer debt down over a sensible time period with clear controls and a repayment schedule. This would prevent the large increase in public indebtedness that will result from the inclusion of all Northern’s obligations on the public balance sheet.

He could continue by imposing a staff freeze on all new recruitment for non front line staff, to bring the civil service and quangoland back under some control over numbers after the years of rapid growth.

He could cancel or delay many of the large computerisation projects that bedevil this government’s approach to management.

He could take some simple steps to increase energy efficiency across the public estate. He should institute reform of personnel management, to bring the public sector absentee rate into line with the private sector, where it tends to be considerably lower, saving staff resources.

We are in dangerous and uncharted waters. The UK ship of state is carrying too much surplus weight and is not being sailed well. We need more liquidity in markets, and lower interest rates, but the poor performance of the UK public sector constrains UK action.

PS: It is curious how Vince Cable got so much air time from the BBC when he became the consistent advocate on Northern Rock nationalisation, at a time when the government appeared to be dithering. It is almost as if the government wanted a Lib Dem to front run the idea, so Labour could not be accused of going back to Clause 4 and their old nationalisation agenda. Presumably the BBC gave Vince so much airtime for his idea because they had reason to believe the government would pick it up. They gave practically no airtime to more sensible proposals to contain the damage and bank Northern Rock intelligently, because they were aware the government would not go that way.

It was interesting to hear the government’s scientific adviser tell us this week that there is a problem with the long term supply of agricultural produce and energy, as if this were news! He thinks this ranks alongside the climate change issues which have been the sole worry they have talked about for a long time. Anyone who has been watching the markets in oil and wheat will know there has been a price surge despite the active talk of slowdown and recession in the western economies. It is a sign of how the balance of economic power is shifting to Asia. It is proof that many more people in world now can afford western standards on their dining tables.

There are two main causes of extra demand for food and energy. The first is a rapidly rising world population, and the second the increasing affluence of formerly poor countries. Each new birth brings another mouth to feed and another body to keep warm. Every increase in the average incomes of India and China brings more families who wish to eat meat and can now afford to. Meat production requires much more grain per head than if people ate the grains themselves instead of eating an animal which has eaten them. The richer countries are unlikely to increase their demand for food very much, although there can be substantial changes in food fashion. Very poor countries boost their demand for food as they get richer, as they tackle undernourishment and demand more foodstuffs that require more argicultural effort to produce.

The government’s adviser told us that the solution is greater agricutural productivity, because he said the amount of land available for agriculture is limited. That seemed a strange idea. If we are to be successful in allowing the world population to expand by a futher 3 billion people, and accommodate the reasonable wish to many of the poor to have a better diet, we are going to require more agricultural land as well as a farming revolution. As one cynic said, it sounded like a prelude to more government support for gm crops, when there are a range of options.

There are still many parts of the world where farming is not nearly as efficient as the best. Much of our grain comes from the US prairies, where huge farms yields big crops of grain, planted and harvested by enormous machinery that enables relatively low cost production on an industrial scale. In many other parts of the world small farms and small fields prevent using the largest machinery, and lack of capital forces farmers to use less efficient ways of sowing, tending and reaping. There may need to be an agrarian revolution elsewhere to feed the multitudes.

British agrarian history shows you that the cultivated area can expand substantially when prices go up and when there are shortages. Today we concentrate our farming in fertile valleys. There are signs that in past crises farming has worked its way up less promising hillsides. There are huge areas of the world that are unfarmed, where natural vegetation could be replaced by crops given the application of capital and in some cases irrigation. Some soils will need improvement, but that too can be achieved over time. We should not rule out the possibility that part of the answer to the growing scarcity of grains will be more acres under grain crops.

We may also have to accept that more people will have to stay on vegetarian diets, or more people used to eating meat once or twice a day will need to find substitutes and other dishes some of the time. There needs to be a twin response to more supply – more land and better techniques, whilst changes in demand patterns will achieve the rest.

We also see the impact of greater demand from Asia for energy. As people get richer they want to drive cars, run fridges, use more hot water, install more light bulbs. It’s what we have done, so naturally we should expect Asians to do the same. We need to remember there are many more of them than there are Americans and Europeans, so all things being equal we should expect a big price impact on energy.

Rising prices will force the rich west to be get smarter with energy use, just as it will delay the growth in energy demand in rising Asia. it should also begin to unlock a better longer term answer to the problem. There are three main components to a longer term solution.

The first is energy efficiency. Progress has been made creating more fuel efficient cars, washing machines and homes. There is a long way to go even to adopt the best modern technology into every western home, whilst there is every reason to believe there are huge gains still to be made through better design in the future. High prices for energy will accelerate investment in more fuel effiicent devices,and in innovations for more fuel efficient products.

The second is discovering and developing energy substitutes. There is a big expansion possible in renewables and combined heat and power, and we may be close to a breakthrough in the use of a variety of cleaner technologies like hydrogen.

The third is to find and exploit more of the carbon based reserves there are still available.Within the family of carbon based energy itself there is scope for developing clean coal technology, so we can use more of the large coal reserves many western countries enjoy. Many oil and gas fields have been run down or closed with considerable gas and oil still in them, as the means did not exist to take it all out. As prices rise so technology to manage reservoirs will improve, making higher extraction rates possible.

The government’s adviser is right to warn of the importance of food and fuel. The big price increases we are witnessing will send strong signals to the market to do something to raise supply. Governments should ensure that their purchasing patterns and regulatory requirements reinforce the message that we need to do more to find alternatives and use energy more wisely.